December 5 2011

Payroll Tax Pandering

Nicole Kurokawa Neily

When I hear that both parties in Congress agree on a policy outcome, my immediate reaction is “hide your wallet!” (You may also consider hiding your kids and/ or your wife.)

Alas, that’s what’s happening on Capitol Hill this week, since it seems that everyone’s agreed that we need to extend the payroll tax cut “holiday” for another year.

First: what is it? The payroll tax – part of which is earmarked to pay for Social Security – was reduced temporarily last year from 6.2 percent to 4.2 percent. Of course, retired Americans weren’t forced to take an equivalent cut in their Social Security benefits, so we’ve been paying out the same amount to seniors, just with less money in the bank. Obviously, Social Security’s been screwed up for ages, but this “holiday” has just exacerbated the program’s fiscal mess.

Let’s get one thing straight: I’m all for keeping money out of bureaucrats’ sticky, grubby hands. My concern with the one-year “holiday” is that it’s just one year… and we have to stop changing the rules around to provide certainty for businesses and individuals. For sustained economic growth, our economy needs certainty – not political gamesmanship. Not all tax cuts are created equal: some have a greater effect than others. In my book, temporary ones are silly… and even worse, they enable politicians to dodge the serious underlying problems at hand.

As the Cato Institute’s Tad DeHaven notes, “supporters of extending payroll tax cuts think that adding another $265 billion to the deficit next year will somehow spur growth. That ‘stimulus’ would be on top of the $1 trillion in deficit spending that is already expected in 2012. Far from helping the economy, all this deficit spending is destabilizing financial markets, scaring businesses away from investing, and imposing crushing debt burdens on young people.”

As far as passing the payroll tax cut extension, it looks like the major sticking point between Democrats and Republicans is how to offset the decreased revenue stream; Republicans hope to pay for the temporary extension by cutting the federal workforce, freezing federal worker salaries for several years, and means-testing entitlements like food stamps. In comparison, Democrats want to pay for it by imposing an income tax hike on those evil “millionaires and billionaires” (also known as investors, entrepreneurs, and small business owners).

The Democrats’ plan is terrible: it would disincentivize job creation and investment, and create an incredibly hostile business climate for foreign companies (many of who would likely pull out of the U.S. altogether.) The GOP’s plan is the less damaging of the two (and since federal workers are generally overpaid compared to their private sector counterparts, I’m all for freezing pay and eliminating positions!)… but at the end of the day, it’s still temporary.

It’s crucial to reduce Americans’ tax burden – so let’s make a permanent cut to the payroll tax. And while we’re reforming things, why don't we allow people to put that extra money in their pockets into private retirement accounts, rather than a government-run Ponzi scheme that earn an almost criminally low rate of return. Don’t believe me? Check out Table 3 in the Social Security Administration’s July 2010 report.

Slowly winding down Social Security and transitioning to a system based on private accounts would encourage personal responsibility in retirement decisions and give people more control over their assets – and in addition, we’d make a serious dent in the crushing burden of government spending. A permanent cut in the payroll tax would be the first step towards a worthy end.

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